Matching Principle (Kongruenzprinzip)
The matching principle requires insurers to align their assets in currency, duration, and liquidity with their technical liabilities so that valuation fluctuations do not have an uncontrolled impact on solvency.
Concept
The matching principle is a fundamental principle of investment management for insurance undertakings, under which the assets used to cover technical liabilities should be structured to correspond as closely as possible with those liabilities in terms of currency, duration, and liquidity. The aim is to minimize the risk that exchange rate or interest rate fluctuations lead to a decline in the value of liabilities that is not offset by a corresponding movement in assets.
Currency Matching
A central application is currency matching: liabilities denominated in a particular foreign currency should, as far as possible, be covered by assets in the same currency, in order to limit foreign currency risk to a regulatorily acceptable level. Corresponding requirements are found in national investment regulations such as the Investment Ordinance and in the prudent person principle under Solvency II.
Relevance for Asset-Liability Management
The matching principle is an integral part of asset-liability management, since inadequate matching between assets and liabilities can expose an insurer’s solvency to substantial fluctuations and, in extreme cases, lead to a regulatorily relevant shortfall, even if the values on both sides of the balance sheet are equal on average.